The History of Loyalty Programs, Part Two

Jul 15, 2015


In Part One: Between 1896 and 1990, loyalty progressed from trading stamps to the first generation of data-driven travel, hospitality and credit card programs. By the late 1980s, programs began to grow beyond the transactional model, delivering enhanced services and benefits beyond points and rewards.

By the early 90s, loyalty programs had become routine in many business categories. The next generation would shake things up, with programs extending into new categories, becoming nearly ubiquitous, driving more revenue and profit, introducing more creative rewards and partnerships and finally, becoming experiential.

Club cards and coalitions

In the 1990s, supermarket chains including Kroger and Safeway in the U.S. and Tesco in the U.K. introduced club pricing, which became wildly successful – at least in terms of market penetration. By requiring members to use their card to get the lowest prices, stores signed up over 90% of shoppers. The chains now had a wealth of individual customer data; but much of the data was used in aggregate by stores and their CPG partners, often failing to target individuals with meaningful and relevant offers. An added bonus for retailers – discounts were usually funded by manufacturers.

In time these programs grew better at leveraging data, with Tesco establishing best practices. Today, customers receive highly targeted offers and messaging via mobile apps. Most programs today include partners; in the U.S. most major supermarket chains partner with gas station chains, to deliver two of the most important needs of American families: food and fuel.

But program partnerships have grown way beyond the food and fuel model, becoming broad coalitions of marketers in many categories.

In Canada, the U.K. and Europe, coalition programs like Air Miles and Nectar, introduced in the 90s, have been very successful, largely because of the greater consolidation within categories like grocery, compared to the U.S. When Air Miles was introduced in America in 1994, it failed to gain traction. Today there are new efforts to launch coalition programs in the U.S. – we’ll look at them in the final part of this series.

Miles and Milestones

Today banks and credit card issuers are integral partners in loyalty programs, with many brands offering credit products like private label or co-branded cards. In the airline industry, the first co-branded card was issued in 1986 by Continental Airlines and Marine Midland Bank. The entry of credit cards started the movement towards recognizing dollars spent instead of the frequency of purchase represented by miles, trips or stays.

If there is a single tipping point underlining the importance of loyalty programs, it may have been American Airlines’ report in 2006 that the airline earned more from selling AAdvantage miles to its partners, like Citibank, than it did selling airline tickets. Programs had grown from a “gimmick” to incent customers to share data, to a business selling loyalty currency that is larger than the airline itself.

Packaging Loyalty

Until the early 2000s, loyalty programs were limited to those industries where marketers have direct relationships with the end consumer, like banks, hotels and retailers. But as

loyalty technology became more affordable and new media made communication almost free, manufacturers began to think about building direct relationships with end users. And they had to do it without disrupting the retailers who are their distribution partners.

It’s no surprise that the first CPG company to enter the loyalty field was one of the world’s great brands – Coca Cola. In 2006 they launched My Coke Rewards, giving consumers the opportunity to go online and enter codes from product packaging to earn points redeemable for merchandise and members-only experiences. The customer experience, which requires entering a lengthy code manually, could be much improved. The program is still in-market and current technology is gradually improving the experience. While nothing has been published definitively crediting the program with increasing revenue, the program clearly engages consumers, and opportunities with other CPG companies are exciting.

Elevating loyalty from program to experience

In 2007, Virgin America airlines changed the loyalty game. Their program, Elevate, was a dramatic departure from legacy frequent flyer programs – and it changed the way airlines, other marketers and consumers look at loyalty.

Over the years frequent flyer programs delivered less value to members, who complained loudly and publicly. “Free” flights cost more and more miles; blackout dates made award travel impossible at certain times; and capacity controls reduced the number of seats available for awards. The industry felt locked into a structure based on miles, because of customer familiarity and precedence. However, there were huge variations in profitability per mile flown. There were also huge variations in the value of a 25,000 mile reward which could be redeemed anywhere within the continental US. There was a fundamental mismatch between profitable behavior and reward payout.

Why did the airlines go with miles in the first place instead of dollars? Because miles were the only data point that could be measured by individual flyer in the 1981 data systems. The reason for one 25,000 mile reward across the US was the same – it was all the original systems could handle.

Virgin America blew it up with one simple insight: why not manage earnings and rewards using the same system we use to manage fares? By awarding points based on dollars spent, and dynamically pricing award seats, no blackouts or controls were needed. Any seat on any flight was available for award use, at the right price in points – earning and rewards now matched profitable behavior. The system is fair and transparent for flyers, and more profitable for the airline. Dollars for points were by now commonplace for credit cards and retail programs so the concept was easy to communicate and advances in real time digital technology made booking a dynamic reward intuitive. This approach was such an obvious win-win, it was adopted by Southwest and JetBlue.

But it wasn’t just the financial game Virgin changed. Elevate was designed to be more than a transactional program; it is part of the overall brand experience. Membership enables access to enhanced services, like the onboard entertainment system that turns an airplane into the member’s personal playlist. Members can play games onboard, competing with other passengers and sometimes other planes. Back on the ground, Virgin personnel congratulate the winners.

The influence of the groundbreaking Elevate program can be seen in today’s best programs, like Starbucks’ integrated mobile app that combines and integrates real time loyalty, payment vehicle, games, offers and more. Loyalty programs would never be the same.

Up next in the final part of The History of Loyalty Programs:

Loyalty goes mobile, social and 24/7